The S&P 500 Is About To Collapse, Day 1, Vol 1

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As much as many of you around here don't care for GMX, I'm going to pay tribute to him here by whole-heartedly agreeing that the market is in for a major correction to the downside. I had been waiting for confirmation of a change in attitude and figured late last week that we were within days of finally seeing the fruits of patient waiting. Alas, a plethora of ghost-bullishness has us rallying like we've dropped 40% over the past two months. We are in for a very hard, very fast move to the downside that will come as a surprise to many. Really, I swear I'm not a perma-bear, though it may seem like it the past seven weeks, but there are just too many negatives here to continue standing behind this rally, especially the one over the past 4 days that has us up 8.3% off of the lows. What negatives you say, glad you asked..... *breathes deeply*

• CIT Group is going bankrupt and the government is going to do a darn thing to stop it. CIT is a financing middle man for something on the order of 300,000 small to medium sized business and its very likely that some of these businesses will have their money frozen during the bankruptcy process. The simple fact that the market is ignoring the impact that the fourth largest bankruptcy in history would have on the market is arrogance at its finest. CIT is going to have a wide ranging impact on the retail sector specifically.

• I don't care how many times I have to say it, a gap on the S&P 500 chart will not stand! The S&P 500 has not been able to sustain a gap in its chart for longer than a few weeks in nearly two decades. The setup here is also undeniable as the gap coincides perfectly with that little indicator that I despise so much, the 50 day moving average. Although we've broken the downward channel to the upside, we've done it on non-convincing volume and with a gap. I'd be in the bull camp technically, if we managed to break through the upper channel without the gap, but leaving it there and even filling it will not be enough.

• The put to call ratio has been exacerbatingly skewed toward the bears. I mentioned in my last blog that I should have looked very carefully at the amount of open calls for the July 93 contracts on the SPY. Traders did everything and anything in their power to move the S&P 500 up to a point where their contracts were no longer worthless. Still, the amount of Aug 80 and 85 puts are going through the roof by the day. Options sort of act like a road map to tell you where traders are placing the majority of their short-term bets, and right now, beyond tomorrow, the traders are telling you to sell your stock and bet short.

• Despite the Obama administration's best efforts, the foreclosure rate rose another, incredible, 15% last month. We're talking now that 1 in 380 homes in America received a letter of foreclosure in the mail last month. Inventories are rising like mad given this rising rate of foreclosures and as silly as the idea Warren Buffett proposed might seem, it may be time to axe the production of all new homes in order to get rid of the glut of inventory.

• Unemployment rose to 9.5% in June and continues to look like its on a torrent path to 12%. This wouldn't be such a completely insurmountable situation if hourly earnings weren't stagnant as well and now inflation (as of those June numbers) is starting to kick into high gear. We have people who want to work, working less hours, making the same amount of money, and having to deal with rising prices yet again because the Obama Administration can't, nay, won't stop printing money!

• Earnings have not been that spectacular, definitely not enough to warrant an over 8% move to the upside. Intel reported its first quarterly loss in nearly two decades, JP Morgan warned that the credit side of their business is still very poor and would amount to more losses in 2009 and 2010, and Google reported tonight that ad revenues in Q2 were weaker than expected. Particularly of interest in Intel's report and a few other smaller reports thus far is that the growth has been from foreign countries, not the United States! We are still very much in a recession here and a few people are blowing up the balloons for a party still six months away.

• Stocks can't rally without energy! There, I said it! Energy is just as important to a market rally as the underlying financial and tech sectors which have been the main proponent of this four day shenanigans period. Oil has moved approximately 20% below its earlier high and commodity prices have been relatively stagnant, if not moving steadily lower. Once again, we're ignoring the bad as if it doesn't exist and praising the little good we receive.

When I look at a gap in a chart, I'm looking for an area that a stock or index has completely ignored in its trading. For instance, the S&P 500 traded between 898 (cant remember exactly) and 906 a few days back. The following day its intraday trend took it from 916 to 932. So that area between 906 and 916 didn't get any normal hours trading. On a chart it shows up as a gap.

Think of a gap like an air pocket in the concrete of a foundation. If you're going to build something, you start with laying a solid foundation. If that foundation has an air pocket, there's a good likelihood that this "air pocket" will need to be filled in before any further building can occur. Sometimes this means re-testing the top of the gap (in this case 916) or filling the gap completely (going all the way back to 906).

I'm sticking with my original level here which is 808, which places the current suspected move at 14%. It's not so much the move, as it is the relative speed at which I expect this move to occur.

I'm inclined to agree, the quality of liquidity in the market is very poor from what I've seen lately. Sharp moves might be the norm for a good while. Well that isn't anything new though is it? :)

I haven't found anyone who can pick out crappy companies quite as well as he can yet.

Everydayinvestor was the master imo but he's basically left CAPS. I agree GMX is a hard one to beat, he's very good at that. BravoBevo might be the absolute best since he plays both sides of the equation.

A lot of people like GMX(including myself). I bet he's one of the most popular people on here. It is quite unfortunate he's on a caps break. The only thing I don't like about him is his ability to not let go the fact that he is wrong sometimes. I'm not saying you are wrong but this post reminds me of that.

BravoBevo is very good at finding companies with very low floats that are in tight ranges and ready to move one way or another. The only "beef" I guess I have with BravoBevo is the overabundance of low volume pink sheet and over-the-counter stocks that he(she?) has traded. I mean I shouldn't talk, I even have 5 of my 126 picks in that range, but I'd bet a much larger percentage of Bravo's picks are very low float, low volume plays.

The market will almost always do the thing you were not expecting it to do. Remember, if you believe it is manipulated, as many do including me, you must also recognize that the manipulators are aware of what you and other analysts expect. For best results, they would calculate what was needed to scare or destroy those following the logical market movements, employ enough capital and volume to geta all the rats running for cover, then scoop up the piles of cash that comes flying out of your pockets as you bolt out the door.

They have the capital clout, the staying power, the ability to outlast you and everyone else who believes that history and trends still call the shots in the markets.

The spun headlines and "headfake" market moves shoud be all you need to realize that charting and following algorithms will give you a sense of hope and satisfaction (and even entertainment), but others are manufacturing chart moves (making history) which will always trump your charts, while you're stuck using old data (yes, even yesterday's data is old), and consulting your tarot cards and crystal balls.

The market has become the weather, and I would not doubt that the market making trading programs are based one these "weather scenarios" that can be extremely unpredictable and go completely against your best guess, prediction or "feeling" on any given trading day. The thing about it is that these market making machines (owned by the like of GS and MS), create the market weather and you and I will alway react to it. They're like financial Gods.

So don't try to outmanuver the one controlling the moves. Your best bet is to take all your money out of the market and start your own business, buy something useful. Using charts and historical data to navigate the modern financial seas will get you shipwrecked in a hurry.

The markets and the economy are asynchronous now because the market is no longer pegged to the economic, just as the value of currency is no longer pegged to gold.

An example of a "directed" market is the fact that the indexes no longer contradict eachother to any significant degree. All the indexes move in a very correographed fashion. This is organized, planned market movement.

I tell you, the market will move in the direction the makers determine, when they determine. All the tell-tale signs (unemployment, decreasing profits, credit defaults, foreclosures, etc.) are just choices at the makers' buffet...choices that can justify any movement, any time on any day. Shall the market go up today? Why yes...we need a reason. Find one in the media. Shall it go down. Why yes...we need a reason. Find one in the media. Should oil go up today...why yes. Supplies are suddenly short. But next week supplies will be declared plentiful so we can push the price down.

Decisions at the highest levels draw your charts for you. All you can do is react.

Yet despite that thread, I still haven't seen any doomsday "evidence" (not mere "argument") to indicate another crash to the lows. As I said many times, it is all about GDP in the end. To warrant a further retest of the march lows simply would require continual GDP decline at the rate we saw the last 2 quarters. And the evidence simply doesn't suggest this.

July 30th projections for 2nd Q GDP vary from -1 to -4. Even at the worse side it wouldn't be as bad as the last 2 Qs. Furthermore, 3rd Q and 4th Q are projected to either hit even or up a bit. A far cry from what we just saw.

Also, I prefer to look at Value Line's PE stats for several reasons. First it covers a well rounded "world" of 1700 stocks. Second, and more importantly, its stats are simply beyond contestation. I keep reading too many differing opinions as to what the S&P 500 PE valuation is. Value Line had the March low at 10.3, last high at 19.7 and on July 3, 14.8. Accordingly, we see a fairly priced PE multiple at worse.

As for energy, it still is doing well so I wouldn't be discounting this. I did warn that it would drop after July4 (see my response in the above link). But oil is still holding over $60, which is still a solid number should it maintain this the next few months.

Finally, and most importantly, we have Mr Gloom himself, Roubini, seeing an end to the recession in the foreseeable future.

We had our correction, which was needed. But it really did recover surprisingly fast tho which might suggest a further run up, or another, smaller, correction. Who the heck knows ;p But I did buy some BMY this week for my real life portfolio.

I would have thought the S&P would trade down to the low 800's also but with so much good news I'm not so sure we'll see it.

Earnings are coming in on average 20% over estimates. I don't see how you can discount this. Lets face it- earnings are what drive stock prices. You can argue til your blue in the face about unemployment, stimulus packages, technical gaps, consumer spending and the mortgage sitituation - but if earnings dont move up your stock price wont either.

There's trillions on the sidelines waiting to invest so if the markets moveup from here it's super rally for a while.

What if those trillions (are there trillions on the sidelines and what are they currently invested in?) are invested in bonds?

Have a look at this FT interview (if you don't have the time to watch the whole thing (you should though!) start at 6:10/7:32. Maybe people are indeed going to be sucked into the bond market.

In some other recent interview Hendry mentions that almost everyone is currently underinvested in government bonds (except for some SWFs and the Fed, hehe, but you of course always need someone overinvested to give others the opportunity to be underinvested) compared to the asset allocations that were normal in the past.

Profits are coming in well ahead of expectations, but in 2 out of nearly every 3 cases, revenue is coming in below expectations. All these profits are just a combination of various cost cutting methods. If you layoff 10k employees, you're going to save some money. It's the sneakiest earnings beats in history. Did you catch it? There's no real growth here at all right now.

But that is exactly what you do during a recession. By defintion of a recession you wouldn't expect revenue growth. To remain profitible you cut costs. Once a turnaround begins then the growth kicks in, hopefully anyway.

All these layoffs have a silver lining for many corporations. Let's face it- there's a lot of dead weight at a lot of companies. You know the people - playing solitaire all day, hanging around the water cooler, having a smoke break every 5 min. This has been a great opportunity for corporations to cut these people loose. They were a drag on the productivity of the company. Now with the recession - companies have a good excuse to lay off these people. Once the recovery kicks in (hopefully later this year as per Roubini) companies will be more profitable than ever.

The correction will come the day I finally close all of my shorts. Not a day sooner. Since I don't see myself covering anything anytime in the near future, you can pretty much count on S&P 1000 before anything else happens.

In the interest of debate, and not meant to flame, taking a bullish shot at the points made in the original post:

1. CIT bankrupt. Well....maybe. And Bankrupt doesn't mean dead - this is America after all where it can be kinda like a cold shower before you go back to work :) Latest news is their is interest in funding them back to health - after they go Banrupt and get the current bondholders to accept a debt for equity swap. And even if it does godown the pain level is hard to gauge - factoring is what we need to worry about and their are other sources for that. Will they step in? It's easy money in the banking business and the banks doing well have no interest in the economy freezing up at this point. So this one makes me the most nervous of your points but I come down on the side that the government is on the ball (now) and if that was going to happen on a large enough scale they would bail it out.

2. Gap in technical charts. If this happens it wouldn't be a plunge it would be a drop back down to S&P 900 ish (still a 20 point gain from the 880 low last week). Tech analysis has been struggling at times this year. Market is in an unusual mode recovering from a generational event last Fall. Your inability to describe the real reasons for this effect in market terms, and instead the use of a cement analogy, indicates you don't really understand in market terms why this happens - you have just observered that it does happen. This makes this effectively magic - meaning it just works and you don't know why. And magic works great - until it doesn't. And their is a lot of that going around in this market lately. Are you sure this didn't happen in March? We had some pretty steep jumps their that never got retested to my knowledge.

3. Options action. I admit I struggle with options since I don't trade them and so have a hard time following the lingo. However I did come across this interesting quote when rearching around the web (quote is from Index Indicators website):

Most of the time, the market proves the majority wrong, and therefore, put/call ratios are contrarion indicators.

Also the chart I looked at their showed the current overall Put/Call ratios heading sharply back towards 1 this week. Both of these points serve to counteract your use of this for a bearish claim.

4. The foreclosure wave has been discussed for several months now but the banks are just outrunning it. They make more then it costs them. And the bank CEOs are starting to say the worst is over - see quotes from JP Morgan CEO today on their earnings. The effect on the housing market remains an anchor on the economy for sure. But to claim it's catastrophic - not seeing any evidence of that.

5. Unemployment. Yes it's a big worry. But again you use some hyperbole. It's not a Torrent path - the increase is reducing month to month. No one is claiming we are out of the woods on it but it is a known lagging indicator and it is improving. And their is more than half a trillion dollars in stimulus still not spent - that effect will help this. And as far as the last comment - you complain at the top of the post that the government won't bail out CIT (throw the states in with that since they are resisting that also) and then here complain they won't stop printing money. Arguing both ends there a bit I think.

6. As others have posted, earnings are coming in as pretty good news overall and the market is responding to it. Revenues are down FROM LAST YEAR'S QUARTER but in many cases are improving (nicely) from Q1 this year. That is huge and shows we are clawing out of the hole. Of course they are down from Q2 last year that isn't even news at this point.

Of the 55 S&P 500 companies who have reported, 71% beat estimates, 9% were in-line, and 20% were below estimates.

That is pretty good news so far.

GE is considered by many as a good representative of the overall economy since it sells just about everything to everybody. It got beat up today since it beat earnings but Q2 revenue was only 39.08 Billion - a 17% drop - from Q2 LAST YEAR. But it rose 2% from last quarter's (Q1 2009) revenue. Now that's not a lot, but it is positive growth this year! Since the stock price has dropped 30 to 12 over the past year, but revenues are only off 17% at this point, perhaps this stock is a great buy! Warren Buffet thinks so - and so do I. GE will double or triple from it's current price in 2 years time.

7. Energy. I take it you missed all the news last week about the oil trader who got caught driving up the oil market and that it went to $70 on pure speculation from this trader (and maybe some others) and was not driven by any demand. This happens because speculators have discovered that the commodity trading laws are outdated and you can leverage 10:1 on your action. We need to fix that. But anyway seeing it come down $10 a barrel only means at least we are getting smarter about catching this nonsense sooner, since the same exact thing was occurring last year when oil was at $140. The drop in oil price is great news - it's getting back to where it shoud be and cheaper oil = cheaper gas = more money for people to spend on other things.

So we have some counterpoints to your points all in the spirit of good discussion. :)

The correction will come the day I finally close all of my shorts. Not a day sooner. Since I don't see myself covering anything anytime in the near future, you can pretty much count on S&P 1000 before anything else happens.

If you're not sure, check with me, i will confirm that i also closed my shorts, and then the bear can begin -solaris

Well, we have been in a bull for months, and the bears are still in power in caps. I know how to add, and where i won't predict when, i do believe that the market will go below 840. There are more failures coming, and more unemployment. Housing will not recover quickly, IMHO. -solaris

Well, I was thinking today, we are up 7% for the week, and that is after 30-40% non-stop rally already. It used to be 7% gain was an acceptable gain for a whole year. No, 10% up/down in a week is nothing. This is crazy market. I wonder how far you have to go back to find market like this. I mean, not counting last year. Last year I remember we had a 7% up day once.

I don't know why we even talk about investing in this market. It is a casino and the chances are stuck up against individual trader.

I am going to wait for the final crash, and then I'll buy whatever is cheap, which will be everything, so I'll buy the cheapest quality. If crash never (meaning next 6 months) comes, so be it. I am not buying this market because the downside risk at this point is far greater.

I have always found it pretty amusing what a big deal the U.S. media make of an intraday "100 point Dow move" even when the Dow Jones Index is above 10000 points. Every country has its traditions I guess. No one "in his right mind" would recreate the Dow Jones Index today but there are quite a few people that still pay attention to it.

The fetish of the German financial media are the round numbers, even if it just something like "the 4800 line in the DAX". They are just not happy without seeing a battle at some round number even when the index apparently does not care about it at all. Oh well ...

Since it's just in the nature of good ribbing.....allow me to rebutt the rebutt =)

#1.... based on what you said above the government is running on lagging indicators and is hardly on the ball. When I think of the governments decision on whether or not to bail a company out, I think of the South Park "economy" episode where a chicken gets its head cut off and wherever the body finally dies on the bailout wheel is what the government chooses to do. There has been no rhyme or reason to their methodology. As for CIT, regardless of a bailout, there are 300k small business owners crapping their pants right now.

#2.... Technical analysis isn't a cemented logic but a growing amalgomation of historical data. It is far from magic, but rather a strong following of data points that has a very large herd mentality behind it. It's grown too large to ignore over the last 4 decades and it adds depth to the fundamental side of the market. There were no gaps left in March. In fact there has only been two solid gaps left since March and 1 was completely closed within two weeks. The only one remaining is the current one at 906.

#3.... It depends whether you're talking about put to call ratios for the S&P 500 or the broader market. I am merely proposing here that the S&P 500 is heading lower based on a continued exacerbation in the amount of open put contracts. Over 415,000 open contracts on the Aug 80s now with solid amounts present at 85, 90 and 92 as well. The bets are clearly to the downside at present and they've only grown since Monday.

#4....No evidence of the foreclosure wave being catastrophic? Everyone is beating EPS estimates right now except for the new home builders who continue to see massive losses. 1 in 380 homes in foreclosure isn't massive? Housing was the go-to method of wealth creation for two decades, now you have investors completely confused with what the hell to do with their money. So you either have an inventory glut or a credit crisis as these people cling to their cash, you pick your poison.

#5.... Hourly earnings make up all the argument I need for unemployment. You have stagnant earnings, and the highest unemployment and underemployment levels we've seen in decades. Let's not forget the high unemployment rates we see in California, the state which could in the end single-handedly screw the nation.

#6.... Its just too staggering a figure to get over... 60% of S&P 500 companies have missed revenue estimates which have ALREADY been lowered by analysts based on weak economic activity. It shows that cost cutting is the only proven way we can mask the lack of growth right now. Cost-cutting politics just doesn't work for very long. Halloween only comes once a year ya know!

#7.... I'm not talking about oil prices necessarily, but the lack of participation in this rally from anything in the oil and energy sector. Utilities have been behaving particularly poorly and I don't think the rally has any legs beyond this point without the energy sector at least halfway participating.

Just to address your last point. Energy has participated tremendously. May/June rise was driven largely by oil. It was under $45 and hit over $70. It has since corrected (and coincidentally the market followed), but then it stabilized so far, at around $60 per barrel. Utilities are a different ballgame.

Good stuff Ultra long. I have been bullish only until very recently. but the relatively low volume and the revenue declines and credit forecasts have turned me very bearish, very quickly. I'm especially bearish on CRE, Regional banks and oil.

From what sector do some of you see the biggest decline taking place within the context of this scenario?

The fundamentals are not there for energy, yet. A lot of short covering was taking place, making the price of crude rise for a longer period than warranted (I myself held a short position at $70+ and closed after a moderate gain). We are sitting on storage well above the 5 year average, and the demand is just not there. I would expect to see builds on storage continue. The natural gas market is behaving the same way, however, the international component doesn't play a large role in this market, because most of the production is for domestic use. Thus, I am even more bearish on natural gas in the short term. Being that we are so close to my target range in natural gas, I wouldn't expect to see a large drop from here. There is heavy support just above this years lows. If we breach those lows, I will move into a long-term long position in natural gas.

Nat gas can only go down just so much before no one will want to drill for it. So short term I agree, but come next year this slowed drilling should have an impact on supply. Only nat gas plays I prefer playing in real life are the high yielding hedged mlps (like line or evep).

As for oil the may/june run up was oh so predictable (and I did see my blogs). Of course it was speculation driven. All the smart money took their profits before July 4. Cramer coming on tv July 6 and dumping energy from his "pyramid" claiming how he missed the speculation made me swear never to watch his show again. So he got all his viewers into a position and then, when it was too late he just flippantly knocks oil out of his picks leaving his viewers holding the bag.

Oil, long term is still worth playing and people should have time to start to build up their holdings. Personally I like BP for its yield and ATPG for its potential. I own both (though I trimmed BP when it was in the 50s, but slowly have been re accumulating when it is under 48).

We also are saddled with the alt-A, option ARM mortgage reset bubble coming over the next two years, rising unemployment, inflation, and the very real threat of an interest rate spike. I find it very hard to be bullish on the U.S. market for the next 2-3 years, other than maybe in nominal terms based upon inflationary monetary policies.

When I say horrible, I mean in compared to the wholly unrealistic 2006-2007 numbers. But when we're talking about business profits dropping 35% and world trade down 20%, the expectation that the real valuations of the S&P will recover anytime soon is (imho) very far fetched.

The structural misallocations of wealth that occurred during the credit-induced boom phase need to be purged. There is a severe structural imbalance in the economy that will not be sorted through easily. Furthermore, the monetary inflation through debt issuance is only making this worse by adding noise to prices. All of the factors in my earlier post will continue to weigh on the economy.

That's why I can't be bullish on real market valuations any time soon. I'm basically attacking the basic premises of the CNBC cheerleading squad that believe there will be a real market recovery without any real fundamentals behind it.

Also, debt will drag on the economy. The Monetarist-Keynesian economics that is being peddled nowadays is completely out of sync with reality in my opinion. Every government in the world is running deficits. The question is--if everyone is borrowing, who is lending real wealth? Forget money: wealth cannot be consumed that is not first produced. The answer is that the public sector is borrowing from the private sector. By transferring productive sectors of the world economy to the public sector, we are looking at a pathetic return on capital. If real savings in the private sector do not compensate for the spending in the public sector, the difference will be made through inflation. If real savings rise and compensate, consumer spending (70% of GDP pre-bust) will drop substantially and we will see the necessary, and painful, re-balancing of the economy.

There's a good chance that markets will see a substantial rise in nominal terms. I think that if that happens, it will bode very poorly for the economy and indicate what kind of inflation in prices we will see from the monetary inflation we have undergone.

I agree with you that the market is in for a huge punch to the face. I think the floor of 874 will probaly be the stopping point though. That is still a 6.9% drop and I beleive all the banks that report this week will lead us there or somewhere below 900 by Friday. I want to be a bull but, I think I am going to take some profits Monday and be a bull with a ball of cash for next week.

This is a good conversation. But remember this: GS's results were not a splash in the pan. They need to keep this market moving. ALL of their profits come from trading. In a marketplace where fear and loathing are the standard fare, everyone stays on the sidelines, thus taking GS down a road it doesn't want to follow.

What I see here is the general concesus that the market and the economy are somehow directly reflective of eachother. GS made it glaringly clear that the economy can be in the tank while the market is churning along nicely, offering great profits for those who know how to play the game.

So maybe we should all distringuish our statements about the economy and the market. They're different as dusk and dawn.

GS' health is in no way reflective of market health. GS (and all of the i-banks for that matter) make their money off of liquidity and leverage. This is aside from their obvious political influence.

The Fed has increased the monetary base by roughly 100% within a 1 month timeframe and inserted those funds in highly-levered institutions. As this rapid shock of money is distributed throughout the market, there is lots of rebalancing required to navigate to sane price structures between assets. This ample monetary noise helps the automated trading and derivatives divisions at the i-banks to suck that noise off of the true prices in the market. They can make lots of money in imperfect markets through statistical arbitrage. There's actually probably so much money right now that they are deliberately driving prices up on worthless equities to sell and drive them down again; they lose money on the equities but make more money on the put options. I have in other posts mentioned how it is profitable of the i-banks to evangelize the self-perpetuating religion of technicals to the broader market, as this helps them masquerade large equity moves as well as create stat-arb opportunities (but that's a controversial topic :-) so I won't discuss that).

GS' profits are in my book an indication of just how bad the market currently is. It means that there are much worse than expected deviations between true physical realities and prices across all asset classes.

Also, while there can be temporary dislocations between markets and the broader economy, they cannot be separated for very long. If you're predicting (as I am) a multi-year depression in the economy, any real market recovery will be muted for a substantial period. It's possible to have a jobless recovery in the stock market, but it's impossible to have an earnings-less recovery.

Capt Rat writes "I am going to take some profits" That seems to be a sentiment building and given that Monday is a post options expiration Monday, I will leave it to the technicians to decipher what OFTEN happens on this particular Monday following options expiration. A day of profit taking seems likely. It seems only to be determined whether the S&P gets back to the Jan High which it has made or the Nov election day high which may be in sight before the next significant corection against the ACTUAL economic news. I sold a lot of stuff like my CLF +25% in one week, an MLP/CEF partial as it goes ex Monday That in conjunction with a down draft should knock about a buck off "MTP". I also finished off several mutual funds that I have been selling incrementally over the last 6 months. I believe Ultra-long is right. He did not even mention the State of affairs in Calif with the impending debt down grade. The release of State pension fund audits that were supposed to be finished at the end of the fiscal year on 6/30 are being delayed. Dozens of Stares have fired their financial advisors or they resigned in disgrace. Many funds are looking at losses of +25% on top of near 10% or greater losses last year. The cost shifting from the Feds to the States to the counties and towns is accelerating. It is not enough to have artificially low mortgage rates when the other costs of insurance, taxes,water, sewer and heating/cooling continue to rise. The States are already resorting to more gambling and user fee gimicks to fill their budget gaps and then borrow the rest to "balance" their state budgets. The typical State pension fund may now become as much as 50% underfunded as they continue losing tons of money and keep anticipated actuarial rates of return elevated to as high as 8.5% in some states. The OPEB* other post employment benefits, the political correct new speak term for retiree health benefits is falling to below 25% funded. UUhhttt OOHH. No one talks about the "TIC" report released last week by the Treasury. It shows that with the exception of March when money flowed into the safety of US Treasuries and an over sold Stock market, that there has been a negative flow of cash each month in 2009, that is money is leaving the country. Both domestic and international investors are fleeing the US markets and their Treasuries as well. The flight from the Treasuries is still muted but incrementally it is progressing with no end in sight to these bi weekly 10s of billions of dollars of offerings. There is the other side of the aurgument that this is the same type of buying stampede we saw off the March lows and we should march straight to the Nov 1000 S&P mark. A sell off on Monday however will ,break the back (or hearts of longs) of these Dow theory technicians who are looking for support above the 50 DMA and a run through 956 to confirm an on going buying stampede. A new sell off would as ultra long anticipates probably be sharp as it would likely not last much longer than the one we just had of 3 weeks. No need to be shy about getting into the market on any EARLY weakness as long as you stick with the commodity/energy themes with yield. A year end rally should eventually take us to the Nov highs and a little higher in the January effect period. Nat gas should bottom finally near $2.65 by MLK W/E The commodity centric economies like Chile,So Africa,Austrialia/NZ and their customers in Chindia, the not so rich in domestic hydrocarbons will put a bid under oil at $60-80.

I was noting on your chart above that not in any single instance, when the MACD rounded down from a top that stocks ever reversed and went higher until after the MACD had moved completely into the negative side and then rounded back up. The point of capitulation appears also to be at MACD '0'. Isn't that where we are right now? If this is the case, then how is this rally from last week even remotely sustainable? Isn't last week's action simply the 'last gasp' of a dying market?

Ok, im officially ready to declare shenanigans on all 3 indexes. Indexes don't rally 8-10 days in a row without the slightest correction.

You are given the market way too much credit. The Fed is manipulating this market to give the sheeple the perception that the green shoots are plants, not weeds. Just keep your longs as ultra longs. You seem to be doing pretty darn well with that plan.

Many thanks for an excellent original piece above and your subsequent comments. Discussions like these are the best thing about the Fool these days.

When someone called UltraLong is "heading for the hills", it's time to take notice. I'm a little more bearish than yourself especially given the increasingly Polyanna-ish nature of this rally. S&P 700 looks possible.

People talk about the S&P P/E ratio and what it should be. What about the S&P PEG? If the P/E is 17 then for that to be reasonably valued, earnings growth should be 17% for some years?

In any event, I don't see the greatest financial crisis since the 1930s ending with a nice steady rally and a return to business as usual. In July 2008 officials assured us that while things were not good, the situation was under control. In July 2009 I don't see things much further along in terms of repair. The big banks can't wait to shake off TARP and return to their usual carry-on. Goldman Sachs is making huge profits from trading their own book and they will be the first to short and sell at the first sign of (more) trouble. I view the pundits talking up the market as a contrarian indicator. But more than all that, the economy (US) is just very shaky. Mr. Market is having some manic up days right now, but you never see him in a happy medium. Look out below when his high wears off.

Keep up the good work, and the very disciplined CAPS trading. Impressive to see someone score so high on so few concentrated bets.

Thanks for the ROY video. He does a great job and has wonderful intuition of markets and pattern replay, which is critical at this time. Much obliged. Keep 'em coming.

Bank writedowns were a landslide today, but you would hardly know it from the averages. Might take a day or two before the reality of it all sinks in, especially in light of Ron Paul's questions regarding the entire function of FED and economy. Should be interesting.

NINE SPY put contracts between 80 and 92 with open interest over 100,000 and up to 430,000. The jig is up here for the bulls VERY soon. Massive growth in the 87-92 range over the past few days in anticipation of a down move.

I think it's just going to take 1 key piece of bad news, or 1 miss from a major company and this thing will implode. It's practically begging to sell off.

Tommorrow could be the day. Oil should reverse on the stockpile news, asia hit the ceiling, Europe is lower, futures are down, got a lot of companies reporting tommorrow that I would consider second tier.... Probably more AMD's in tech tommorrow than Apples.

Never can tell though, the markets got a mind of it's own, it's clearly demonstrated that over the last week lol.

"Patience is the key here, markets don't go up vertically, there are many indicators calling for a reversal soon and the fact that volume isn't following these SPX moves is important."

Even for an eternal optimist like myself, I moved out of all long positions yesterday and into cash. Better to take the short term profits then to get caught in a sharp downturn but I'm not convinced that this up trend is over.

The BDI lost 100 points of the recent 550 run up yesterday which isn't good.

We may be entering a 4th wave down today and could be looking at the market top for the SPX for a while but it seems unlikely to me that we'll do much more this week then cover the gap UltraLong pointed out.

This chart looked likely to me on Sunday but I'm just learning EW so don't take it to seriously.

I almost pulled some triggers yesterday based on some persuasive arguments in this thread. Sure glad I wasn't sitting on the sidelines today though. There doesn't seem to be any end to the good news in the basic headlines today.

Many arguments made sense if you were looking up from the bottom, instead of down from the top. I think people are slowly accepting March lows as THE bottom now coupled with some really nice profit earnings. Since those profits were obtained during a horrible economic quarter (and kudos for smart companies getting their costs under control as they should have), it does set up for some really nice growth down the road should the economy itself start to rev up.

If there is market manipulation the postponement of the health care bills suggests that there will have to be a lot more manipulation for a lot longer.

Remember that 80 % of this market is institutions. They are a lot more bullish than most of the small investors on CAPS. It is the small investors for the most part who are afraid of the rally or who are sure it will collapse or are shorting it.

The Institutions are getting new cash flows and they are buying on pull backs. That creates traps for the shorts. We could get a day or two of profit taking. However, I think there will be more news that knocks this market up in the longer run not down.

At 1000+ the market can be evaluated. That resistance line is like a magnet pulling the market up overall for the next couple of weeks.

The 50/200 day MA buy signal is a very reliable one. It is looking less and less like it could be a false signal every day.

I think the psychology is starting to change. That will take time for the mind set to change on mainstreet. The Rasmussen comsumer index is up but the investment index is in the tank.

CHING CHING WEEKS, the next few weeks will show some nice spikes in all the stocks,, even the bad ones, as more and more traders gets suck in and more shorts jump in to tear the market down. but it's not the time to get greedy just take your profits everyday and start setting your plan when the market corrects itself. should be when the dow hits 10398 and the s&p above 1048, the correction will come. how far? well u tell me. pretty far i'll say. i will even say, somewhere around 63% by the time it finishes. so if you miss you chance in march, your have another very soon..

Isn't this post now a little bit RIDICULOUS? It was written on July 16, 3 weeks ago, and the market hasn't collapsed yet. Actually, there is a bunch of stocks that have tripled in price in the meantime (if not more).

Yes, I know eventually Ultralong will be right, but at this point, I think it's fair to say: "ULTRALONG WAS WRONG, VERY WRONG."

People who agreed with him missed a huge oportunity to make a lot of money. I think it's a shame that he is a Top Fool right now with his bearish nonsense in this bull market. There are people who correctly predicted what will happen, and I hope they get a credit, and not someone like Ultralong, who just shares simple opinion of millions (What goes up, must come down). It took a genius to say on July 16th: "The market will continue to go up from here, for weeks..."

p.s.

I also think, soon (in a week or so), there will be a correction (in this bull market), but not a collapse. After that short correction, the market will continue to go up...most likely, until the end of the year...

You being a top fool and all...you must know that corrections are inevitable and healthy, right? Why is a correction a "suprise?" Corrections are only a suprise to someone who doesn't understand how the market works or who just started trading last week. Even a little kid can look at a chart of the market and see that it goes up and down while it advances up overall...right? Why is this amazing and new?

You just stick with your good ones and have a 10-15% cash reserve at all times to profit from the downside. Anybody who doesn't have their head up their a-- knows this.

I have another prediction for you that you might find amazing after reading this post:

TOMORROW.............................................................

CHANCE OF RAIN!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

When did i ever say a correction is a surprise? Markets don't go straight up and they don't go straight down. We've been practically straight up for 5 weeks now without a breather leaving gap after gap. This is even more recourse that a solid correction is coming. Give me the 840s on the S&P and I'll give my thumbs up for the 1100s within 12-14 months. Without any re-test of that range, I remain bearish.

I wasn't even going to bother with a response to that gibberish...but what the hell

Hindsight is 20/20 isn't it? Takes a big person to point out the wrongs of others huh? Well, lets just use your merit system that I "cost people tons of money"...because I just have SO many millions of people to follow my every word. Yes, thats sarcasm.... So some stocks tripled...even in the worst markets some stocks triple, your point is moot. I love the PS part..there will be a correction, way to set yourself up to be right if you do and right if you don't. Very nice... you should look into politics, you'd be great.

Of course there will be a correction, but those that jumped on 7/16 with this thread have likely lost much more in gains than they were hoping to save in the correction. Just goes to show, no one can time the market consistently and it’s important to have a long term strategy.

Ultralong, see my blog (it's just 2 posts or so), and see who's into politics. In my posts, I said exactly what is going to happen and when. No politics. I will either be very right or very wrong (so far, I've been very, very right).

Also, I started this "game" beginning of June. At that time I was 46,000+ out of 67,000+.

Two months later, I'm 1,352 out of 68,000 (98 rating from 46 or so). Your accuracy 88.57%, my accuracy 86.11. So, if I were you, I wouldn't brag that much (like you are talking to somebody with a <50 rating).

All in all, once again, I just don't think somebody who called collapse (that hasn't happen for almost 4 weeks now), deserves to be a Top Fool right now.

Lol..Cant we all just get along. Although I see mild improvement in our economy I am convinced that the market doesnt run off of reasoning and only fear,greed and euphoria...lol..However I am confident in my real life holdings although I am begining to wonder why anyone is buying AIG.

And yes, you don't have to be right 100% of the time. Sorry if my comments were disrespectful. I honestly think that your performance deserves respect (I'd be happy if I get to be among 100 top fools). But, you still were wrong...

"I think [Ultralong] cost more people money on this site than anyone ever has."

What an absurd statement! Do CAPS players pay Ultralong for his investment advice? Do CAPS players hire him to be their financial adviser? Or did people take advice from a blog that was written by a guy who plays an online investment game? Get a hold of yourself, dude!

"I agree it is a shame that Ultralong boosted his CAPS score by using 3-9-09 picks."

That's like saying "I think it's ashame that Zack Greinke leads the AL in ERA by using a 6-0 start to the season and only allowing 2 earned runs."

If you're simply trying to vent a little because you're frustrated, go pound on a heavy bag for a while.

I agree with much of what you posit even now; yet, here we are 6 weeks later and the market is up again. So is it that the market can remain irrational longer than we can remain solvent? I think so, too.

What I believe to be the primary driver of this apparently irrational market is the unwavering belief in the traditional V-shaped recovery. Nobody wants to miss this V asset booster. The longer this market remains upward bound, the more valid the V emotion is, and it prevails over all else. For example, today the Unemployment Index rose to 9.7%, but this V emotion held up for a market gain! Profound.

I'm still long on UYG, but I'm ready to eject more than ever before since I bought in mid-March. It's been quite an irrational ride, and if I had gone with FAS, I know I would have been shaken out before now. But, nothing succeeds like success... until it fails.

The best advice may be to move up the wide stops. And enjoy the ride until we're stopped out. Then I'll wait for FAS to come down for entry; or UNG when the NAV-premium is below 10%. Lots of V gunners are picking UNG up early around 9.01 with the 17% NAV-premium. Can't fault the gunners there too much, since the aftermarket has UNG at 9.55 now. Perhaps this distorted ETF is showing us the wild and wooly V way.

All I know is that back in February and March, nobody knew where the bottom was or should be. Nobody was confident, and the market continued downward. The market was just as irrational then as it is now. Who's to say that the Dow should have ever gone below 7000? Who's to say 9000 is not an appropriate level? Or 10000? Technical analysis is not irrelevant, data and information are crucial, but when people are trading with historically unprecedented behavior, historical data must be adjusted and viewed through a lense that can be difficult or impossible to construct in the relatively short amount of time in which this crash and recovery have occurred.

Why is everyone all over this guy's case? He is not your boss, if you don't agree with him then don't agree with him... but why are you trying to hurt his feelings by telling him 'he lost people money'?

And to the guy who thinks he's the bees knees because he plopped a lot of popular green thumbs down on one of the most rapid and easily spotted rallies of all time, hold the big talk for when the rally ends - no duh you're going to be golden until then. Get ready to get knocked off that new pony. Wipe away those tears... there's a big piece of humble pie cooling off for you at home.

I'm new here too - but I didn't go siss. and put green thumbs on everything. Yea I did in my actual stock portfolio (48% over two months and took profits last week) but I am here to LEARN and play the GAME! I'd rather have the red ink in the game than in real life. I am not here to talk caca on someone who actually writes informative pitches and contributes to the site.

Your most informative pitch ever was: "this will go up and then I will say I told you so". Very helpful. 65% accuracy for you...that's more like it